If your wife meets the requirements, she is eligible for a $250,000 exclusion.
With neither spouse meeting the residence requirement of the other spouse's primary residence, each spouse gets a separate exclusion of up to $250,000, as if not married, and the two exclusion amounts add together on the joint tax return, as indicated in section 121(b)(2)(B).
Sale of Personal Residence:
It depends on how long you
owned and lived in the home before the sale and how much profit you made. If
you owned and lived in the place for two of the five years before the sale,
then up to $250,000 of profit is tax-free.
If you are married and file a
joint return, the tax-free amount doubles to $500,000. The law lets you
"exclude" this much otherwise taxable profit from your taxable
income. (If you sold for a loss, though, you can't take a deduction for that loss.)
You can use this exclusion
every time you sell a primary residence, as long as you owned and lived in it
for two of the five years leading up to the sale, and haven't claimed the
exclusion on another home in the last two years.
If your profit exceeds the
$250,000 or $500,000 limit, the excess is reported as a capital gain on
Schedule D.
